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What is a Conflict of Interest and What Conflicts of Interest Really Matter

Dec 28th, 2015

Legal Conflict of Interest

This attorney conflict of interest blog post is based on a chapter from the 2015 edition of Lawyers’ Professional Responsibility in Colorado by attorney Michael T. Mihm, discussing the current law of conflicts of interest as it applies to Colorado lawyers. It draws upon the Colorado Rules of Professional Conduct; the former Colorado Rules of Professional Conduct, effective through December 31, 2007 (former Colorado Rules or former Colo. RPC); Colorado appellate decisions; ethics opinions; the ABA Model Rules of Professional Conduct; the Restatement (Third) of the Law Governing Lawyers (Restatement); and other resources.

If you think you have a legal malpractice claim against your lawyer or a law firm, whether in Colorado or another state, contact Michael T. Mihm (720) 287-7039.

Not all differences among clients rise to the level of prohibited conflicts of interest. Some clients may dislike each other. Generally, a lawyer is not prohibited from concurrently representing clients merely because they are antagonistic to each other. Restatement § 121, cmt. c(iii). Clients may compete in the marketplace and, thus, have conflicting economic interests. Should their competition prohibit a lawyer from representing marketplace competitors? Should a company be precluded from hiring a lawyer with special expertise merely because a competitor retained the lawyer first? In certain practice areas, such as entertainment or sports law, clients may wish to hire a lawyer precisely because of the lawyer’s other clients and contacts within an industry. Do the usual conflict of interest rules apply to lawyers in such practice areas?

Should a lawyer in a small town refuse to shop at a local store simply because the merchant is a client? A lawyer may have a significant difference of opinion with clients regarding matters of community-wide concern. Should a lawyer’s vocal participation in a community issue prevent him or her from representing a client with whom the lawyer disagrees on a public issue?

These are difficult, but real-life, questions. Thus, there must be some objective and reasonable standards for analyzing conflicts of interest and for determining when a conflict of interest disqualifies a lawyer from a representation.

The Standard For Determining Whether A Conflict Of Interest Exists — Generally

The Restatement states that a conflict of interest arises when:

. . . there is a substantial risk that the lawyer’s representation of the client would be materially and adversely affected by the lawyer’s own interests or by the lawyer’s duties to another current client, a former client, or a third person.

Restatement § 121, pp. 244-45. The key words and phrases here are “interests,” “substantial risk,” and “materially and adversely affected.” Thus, conflict-of-interest analysis involves considering (1) what interest is at stake; (2) what is a “substantial risk”; and (3) what does “materially and adversely affected” mean under the circumstances.
The Restatement identifies four questions to ask when evaluating a conflict of interest standard. Those questions are:
1) What kind of effect is prohibited?
2) How significant must that effect be?
3) What probability must there be that the effect will occur? and
4) From whose perspective are conflicts of interest to be determined?

Restatement § 121, cmt. c. Conflicts are categorized as either actual or potential. People v. Delgadilio, 275 P.3d 772, 776 (Colo. App. 2012). An actual conflict of interest is one that is real and substantial, whereas a potential conflict of interest is possible or nascent, but in all probability will arise during the representation. Id.

What Effect Are The Conflict Of Interest Rules Attempting To Prevent?

The first question is, in essence, what evils are the conflict of interest rules attempting to prevent? Do the conflict of interest rules preclude a lawyer from representing clients with differing interests regardless of whether the differences are of consequence, or are the rules attempting to prevent an actual harm?

The ethics rules have evolved to recognize that almost all clients and lawyers have differing interests to some degree. The “differing interests” standard used by early versions of the ABA Model Code of Professional Responsibility was eventually discarded as overbroad and unworkable. See, e.g., Disciplinary Rule 5-105(A), ABA Model Code of Professional Responsibility (1969). The current ABA Model Rules of Professional Conduct and the case law have settled on a standard of an “adverse effect” on a lawyer’s representation of a client. Thus, differences between the interests of clients do not rise to the level of a prohibited conflict of interest unless the differing interests adversely affect the lawyer’s representation of a client.

The Comment to the Restatement states that “[u]nless there is a risk that the lawyer’s representation would be affected ‘adversely,’ there is no conflict of interest.” Restatement § 121, cmt. c(i), pp. 247-48. Note that the standard does not consider an adverse effect on the client as determinative of whether there was a prohibited conflict of interest. Rather, the standard addresses an adverse effect on the lawyer’s representation of the client. This distinction is important. Thus, the conflict of interest rules do not examine the result of the representation, but the quality of the representation, regardless of the result. E.g., In re Cimino, 3 P.3d 398, 401 (Colo. 2000) (“The absence of injury does not negate the violations of Colo. RPC 1.7(b) or 1.8(a)”).

Why this distinction? The distinction acknowledges that certain things are unknowable. A lawyer might have an egregious conflict of interest, and yet achieve a result satisfactory to all clients. But, while the clients may be satisfied with the outcome despite the lawyer’s conflict, generally the clients cannot know what the outcome would have been without the lawyer’s conflict. Thus, the standard objectively examines the incentives and pressures on a lawyer, before and during the representation, likely to affect the quality of the lawyer’s representation, regardless of the result. Id.

The conflict of interest rules do not seek a blanket prohibition of a lawyer representing concurrent clients whose interests conflict in some minor or immaterial way. Rather, the rules bar a lawyer’s conflict of interest when it matters: when the conflict would adversely affect the lawyer’s representation of any client.

How Significant Must The Adverse Effect Be?

A prohibited conflict of interest must matter. This means, generally, that the conflicting interests must be material to the representation. Colo. RPC 1.7(a)(2). “Materiality” is determined by examining the obligations assumed by the lawyer, either by the nature of the representation or by agreement with the client. Restatement § 121, cmt. c(ii), p. 248.

An otherwise immaterial conflict may be material if, for example, a client tells the lawyer that he or she considers the conflict a serious matter. Id.; see also Colo. RPC 1.7, cmt. [6]. In other words, even if a client is unreasonable and the conflicting interests are insignificant, the conflict might be material merely because the client thinks it material. Whether the client is right or wrong is beside the point. Rather, what is important is the overriding goal of the conflict of interest rules: that is, to foster a client’s trust and confidence in the lawyer and the lawyer’s loyalty to the client.

What Is The Probability Of An Adverse Effect?

The rules do not prohibit a lawyer from representing a client if there is virtually no chance that a conflict of interest will adversely affect the lawyer’s representation of the client.

If, for example, a lawyer can limit the scope of the representation of a new client to eliminate the conflict of interest with an existing client, the lawyer might be able to represent the new client despite the conflict; there would be no reasonable chance that the conflict would adversely affect the lawyer’s representation. Restatement § 121, cmt. c(iii), pp. 248-49. However, even if a lawyer seemingly eliminates the conflict, the lawyer must still consider whether, as a practical matter, he or she will be required to communicate information to one client that, despite the limited representation, will somehow adversely affect the other client at a later point.

Similarly, a lawyer must consider the risk of whether the lawyer’s knowledge of a client’s confidential information may inadvertently benefit the new client and injure the existing client. In either case, the lawyer’s possession of a client’s confidential information might adversely affect a client, and the lawyer may be prohibited from undertaking the new representation despite attempts to limit the scope of representation.

The relevant factors in determining whether a conflict of interest may adversely affect a lawyer’s representation of a client include (1) the duration and intimacy of the lawyer’s relationship with the involved client or clients; (2) the work to be performed by the lawyer; (3) the likelihood that actual conflict will arise; and (4) the likely prejudice to the client from the conflict if it does arise. Colo. RPC 1.7, cmt. [26]; ABA Annotated Model Rules of Professional Conduct 1.7, cmt. [26], 5th ed. (American Bar Association Center for Professional Responsibility, 2002) (ABA Model Rules). The question is often one of proximity and degree. Id.

From Whose Perspective Are Conflicts Of Interest To Be Determined?

The standard for determining whether a conflict exists is not the “appearance of an impropriety” standard. Restatement § 121, cmt. c(iv), pp. 250-51. That old standard is overbroad and not particularly useful. Id. The conflict of interest analysis should consider only the facts and circumstances that the lawyer knows, or reasonably should know, at the time. Id. The conflict should not be evaluated in light of information that became known only later and that could not have been reasonably anticipated. In other words, the perspective considers what did the lawyer know and when did he or she know it? Restatement § 121, cmt. d, p. 251.